The Total Costs of Litigation
Many common business disputes do not warrant the distracted productivity, associated costs, and business delays and disruptions of a resolution process that relies on battling attorneys. When a business relationship devolves into a dispute, in order to decide the best path forward, first estimate the stakes, then identify your alternatives, and finally compare the out-of-pocket and hidden costs of each. To do this right, each stakeholder should consider the following:
It only takes one large ego to substantially increase the amount of time and cost it will take to resolve. The odds are very high that at least one of the stakeholders (including the attorneys here) will blow up the legal costs beyond any early estimate.
Legal fees: How much the other side wants to be right
Workers and key business stakeholders will be distracted from work due to information gathering, meetings, communication cycles, depositions, etc. For a complete picture, estimate the number of hours for all involved and multiply by compensation or value to the company rates. Be sure to include CEO or board member time invested in the dispute compared to time spent on the company's strategic development and growth opportunities.
The mere threat of a lawsuit can have a powerful emotional impact on those involved. When legal costs begin to amass due to delays (and there almost always will be), stress levels increase and take their toll on the business stakeholders and employees.
As emotions escalate, what started out as a misunderstanding or mistake with the prospect of a straightforward resolution process to sort out the truth becomes complicated, uncomfortable, and potentially damaging to the business' reputation.
Loss of Reputation and Relationships
Although there are times when litigation makes sense or is unavoidable, in most common business disputes the stakes do not justify its many costs. In a time when organizations are adopting Six Sigma management strategy, which focuses on improving process outputs by removing the causes of defects, a binding non-litigation process that minimizes each of the above costs is far more likely to meet the Six Sigma quality criteria and achieve real and economic justice.
Is this Rational?
In our next issue, we'll discuss how to persuade opposing stakeholders to adopt such a solution.
Service Provider vs Customer
Our latest Resolve involved a laboratory services contract that specified the payment of about $28,000 in penalties if the customer delayed the start of the study. As is often the case, both sides believed they were in the right, actually had good reasons for believing it, and felt the other side was acting the scoundrel. The laboratory had reserved and purchased resources and materials specific to this study and so had lost the opportunity to do other work. The customer had proceeded with the study just a month later than expected and had paid for it thinking the issue was behind them.
Since the parties were located on opposite coasts, we recommended a neutral Arbiter who was a senior attorney with industry experience located in the Midwest. The parties agreed to the Arbiter and a fixed shared cost that was a fraction of the claimed penalty. Over a three-week period, our Arbiter interviewed all the key witnesses, gathered and reviewed all documents, and then, after failing to broker a mediated settlement, decided the dispute.
It turns out that both parties had overlooked the underlying contract's conditions for triggering the penalties, so none were owed. Our independent post-mortem review confirmed that this is the same outcome a court would have reached after many months of communication cycles, formal discovery, briefing and hearing or trial. While not happy with the outcome, the laboratory recognized that it had saved thousands of dollars and substantial productive time. The customer, of course, felt vindicated by the outcome and was grateful to have enjoyed the same savings and avoided the great waste inherent in having to hire counsel to prove they in fact owed nothing.
Just Times asks Tim Padgett,Founder and CEO of Pepper Group and newest Just Resolve arbiter:
What makes you a good arbiter?
I am fortunate that in over 19 years of business, only two disputes went to court, of which I won one and lost one, but essentially I lost both. I experienced first hand the stress, time, and money involved to resolve a dispute via trial. As a member of non-profit advisors and the Entrepreneurs Organization, I've seen many businesses make this same mistake. Each side feels that some expectation wasn't met and each side argues for being right, without regard for sound business principles. Each party could go back and make bigger, badder contracts, however the fact of the matter is, mistakes (perceived or real) happen, disagreements happen, and clients, vendors, and business partnerships subsequently fall into disaccord.
Sometimes disagreements can be solved just by reviewing contract commitments, however many times the solution isn't as clear. As a marketing expert, I've seen typical disputes between printing companies and their clients. A printing company gives a proof to an inexperienced client; the client makes a few adjustments to text and signs off on the proof. Unknowingly, the edits reflowed the copy in such a way that produces a final product that does not meet the client's expectations. From a contractual perspective the client did approve the final proof, however should the client be penalized for not understanding the consequences of the edits on the final product? The client is now withholding 100% of payment for the printing, what is the right thing to do?
This type of misunderstanding is something I've navigated many times for clients and vendors. As a neutral arbiter, I bring this experience to other types of disputes to arrive at resolutions that are fair, just, and the right thing to do.
Have a question for a Just Resolve Arbiter? Contact Ask the Arbiter
Russ Rosenzweig, Chairman and Co-Founder of 86 Pillars LLC; Founder and Former CEO of Round Table Group
You feel your heart race as your face turns hot and fists clench, your jaw tightens and your antiperspirant fails. Adrenaline, noradrenaline and cortisol flood your blood stream, literally preparing you physically and psychologically, to fight or flee. This automatic state of alert response bypasses the rational mind and causes even the most reasonable to perceive everything as a threat to survival.
Everyone at one time or another has experienced this response and after 20 years of helping litigators and their clients locate and engage expert witnesses for legal trials, I've witnessed this typical fight-or-flight response over and over again in disputing parties, legal teams and engaged experts. Regardless of their behavior during more "normal" times, during the legal process, communications take on a tone of stress and urgency, decision making is forced and hurried, followed by long periods of silence, followed by more stress and urgency. The entire process is laced with pride and obstinacy and interestingly the behavior is the same regardless if the dispute is for $50k or $50m.
According to Dr. Ari Levy and Dr. Will Harper, founders of Engaged Health Solutions, a firm that advises, educates, and coaches clients from surviving to thriving, the fight-or-flight response is a physiological reaction in response to a perceived harmful event, attack, or threat to survival (Walter Cannon first described these symptoms). While the response can be useful and lifesaving, in the context of a legal dispute the reaction is counterproductive. Higher level thinking and long-term decision making cannot take place while the body is in a state of "ready," because the only goal is to remove the stimulus such that the symptoms go away.
As a participant in thousands of legal disputes, I personally experienced this diminished thinking capacity and am so moved by the stress and destruction that it wrecks on one's personal life that I changed how I approach these disputes, seeking alternatives that achieve business goals and fair results, without engaging in long, heated, adrenaline-fueled battles.